* Resumption of IPOs risks aggravating liquidity squeeze
* Higher rates targeting shadow banking depressing stock
* "Without money, nothing is possible" - analyst
* So far supportive measures have not inspired markets
* State media signals resolve on reform
By Lu Jianxin and Pete Sweeney
SHANGHAI, Jan 14 The China Securities Regulatory
Commission (CSRC) desperately wants the resumption of initial
public offerings to inspire investors to return to the long
ailing stock market.
Unfortunately, that goal stands in direct opposition to
efforts by the central bank to tighten monetary conditions as it
tries to restrain risky shadow banking activity.
The CSRC may permit as many as 500 firms to launch IPOs this
year, with some estimating that they will raise as much as 200
billion yuan ($33.09 billion).
But as the People's Bank of China (PBOC) continues
tightening liquidity, equities analysts and money dealers are
asking where all this new cash is going to come from.
"Without money, nothing is possible," said Chen Huiqin,
senior analyst at Huatai Securities in Nanjing.
Many equities investors have opposed the resumption of IPOs,
arguing that new listings can only dilute the net market
valuations, causing indexes to slide.
Worse, some money dealers fear large IPOs will lock up
considerable amounts of cash, adding to strains in China's money
markets and possibly provoking more dramatic spikes in
short-term interest rates which could drag on the broader
economy. That would tend to push down domestic stocks, putting a
rally even further out of reach -- a sort of vicious cycle.
"China's stock market is still largely liquidity-driven,"
said Cao Xuefeng, head of research at Huaxi Securities in
Chengdu. "So unless liquidity conditions improve significantly,
there cannot be a reverse of fortune for stocks."
NOT COMING BACK
In the past, huge inflows driven by infrastructure spending
by Beijing and overseas investment helped push the CSI300 Index
to a record high in 2007 and set off another, lesser
rally in 2009.
But those days are long gone. The CSI300 is down around 60
percent from its 2007 peak, and economists believe China's
economy is entering a new era of higher interest rates as
regulators move to mop up the sloppy liquidity that has
supported stratospheric prices for housing, massive industrial
overcapacity, and mired local governments and firms in debt.
Many investors saw another bull run on the horizon in
November, when Chinese leaders announced the boldest economic
and finiancial reform plans in decades, including stock
The news set off a micro-rally between late November and
early December, which may have encouraged the CSRC to make the
surprising announcement that the time was ripe to allow the
resumption of IPOs, which had been suspended for over a year.
Unfortunately, markets did not applaud the decision, and
started a precipitous decline on Dec. 5 that has seen the CSI300
shed over 12 percent so far.
The reaction highlights Beijing's conundrum; for the stock
market to rally, new money has to flow into it, but money in
China is now a very expensive commodity.
CALMING THE MARKET
Beijing has rallied its forces to talk up the market.
"IPOs are not poison," said the People's Daily, the
mouthpiece of the ruling Communist Party of China, in a rare
official commentary on Thursday, arguing against an opinion
popular among retail investors that IPOs are inherently
Other regulators, in particular the China Insurance
Regulatory Commission (CIRC), have suggested they will guide
more state money into equities, while "encouraging" already
listed state-owned giants to buy back shares, propping up
Other analysts pointed to new policies allowing brokerages
to offer retail investors margin accounts, which could
theoretically allow more money into the market, facilitated by
the implementation of new hedging tools and derivative projects
allowing them to reduce their net risk exposure.
"IPO market reform cannot stop," read the headline of an
editorial in the official China Securities Journal.
The authors rejected suggestions that IPOs be frozen again
while kinks are worked out, arguing that liberalisations should
be accelerated instead.
Few economists opposite the idea that liberalisation is the
way forward, and that in the long run it can only benefit stock
But in the short, expensive money and tight liquidity will
likely keep a lid on any dramatic recovery in China's stock
($1 = 6.0434 Chinese yuan)
(Editing by Kim Coghill)